HOW TO GET RICH – Jared Diamond

In Guns, Germs, and Steel I asked why history has unfolded differently over the last 13,000
years in Eurasia, in the Americas, in sub-Saharan Africa, and in Aboriginal Australia, with the
result that within the last 500 years Europeans were the ones who conquered Native Americans
and Aboriginal Australians and sub-Saharan Africans, rather than vice versa.

Most of that book, was concerned with comparing the peoples of different continents, but I knew
that I couldn't publish a book comparing the histories of different continents and considering
Eurasia as a unit without saying something about the fascinating problem of the differences of
history within Eurasia. Why, within Eurasia, was it Europeans who conquered the world and
colonized other people, rather than the Chinese or the people of India or the Middle East? I
devoted seven pages to that subject at the end of Guns, Germs, and Steel, and I think I arrived at
the correct solution. Nevertheless, since the publication of Guns, Germs, and Steel, I've received
a lot of feedback, and the most interesting feedback has been about the implications of that
comparative analysis of the histories of China, Europe, India, and the Middle East.

In particular, in addition to the review of my book by Bill Gates, I've received a lot of
correspondence from economists and business people, who pointed out to me possible parallels
between the histories of entire human societies and histories of smaller groups. This
correspondence from economists and business people has to do with the following big question:
what is the best way to organize human groups and human organizations and businesses so as to
maximize productivity, creativity, innovation, and wealth? Should your human group have a
centralized direction, in the extreme having a dictator, or should there be diffuse or even
anarchical organization? Should your collection of people be organized into a single group, or
broken off into a number of groups, or broken off into a lot of groups? Should you maintain open
communication between your groups, or erect walls between them, with groups working more
secretly? Should you erect protectionist tariff walls against the outside, or should you expose
your business or government to free competition?

These questions about group organization arise at many different levels and for many types of
groups. They arise, of course, about the organization of entire governments or countries: what is
the best way to govern a country? Remember the classic arguments about whether the best
government is a benign dictatorship, or a federal system, or an anarchical free-for-all. The same
questions also rise about the organization of different companies within the same industry. How
can you account for the fact that Microsoft has been so successful recently, and that IBM, which
was formerly successful, fell behind but then drastically changed its organization over the last
four years and improved its success? How can we explain the different successes of what we call
different industrial belts? When I was a boy growing up in Boston, Route 128, the industrial belt
around Boston, led the industrial world in scientific creativity and imagination. But Route 128
has fallen behind, and now Silicon Valley is the center of innovation. And the relations of
businesses to each other in Silicon Valley and Route 128 are very different, possibly resulting in
those different outcomes.

Of course there are also the famous differences between the productivities of the economies of
different countries: the differing national average productivities of Japan and the United States
and France and Germany. Actually, though, there are differences between the productivities and
wealths of different business sectors within the same country. For example, the German metal-
working industry has a productivity rivaling that of the United States, so the Germans are
certainly capable of organizing industries well, but the German beer-brewing industry is less than
half as productive as the American beer-brewing industry. Or take Japan — we Americans are
paranoid about the supposed efficiency of Japanese business, and the fact is that the Japanese
steel industry is 45% more productive than the American steel industry. Why is it, then, that the
Japanese food-producing industry is less than 1/3 as productive and efficient as the American
food-processing industry? Still another example: in Korea, the steel industry is equal in
efficiency to American steel making, but all other Korean industries lag behind the United States.
What is it about the different organization of the German beer brewers and the German metal
workers, or the different organization of the Japanese food processors and the Japanese car
manufacturers, that accounts for the different productivities of these sectors within a given
country?

Obviously, the answers to these questions about the different success of organizations partly
depend upon idiosyncracies of individuals. The success of Microsoft must have something to do
with Bill Gates. If an idiot were in command of Microsoft, then however superior Microsoft's
organization, Microsoft would be unlikely to be a successful business. But nevertheless one can
still ask , all other things being equal, or else in the long run, or else on the average, what form of
organization of human groups is best? I'm sure that there are many of you here who are involved
with businesses that would like to know the answer to that question.

I propose to try to learn from human history. Human history over the last 13,000 years comprises
tens of thousands of different experiments. Each human society represents a different natural
experiment in organizing human groups. Human societies have been organized very differently,
and the outcomes have been very different. Some societies have been much more productive and
innovative than others. What can we learn from these natural experiments of history that will
help us all get rich? I propose to go over two batches of natural experiments that will give you
insights into how to get rich.

The first batch of natural experiments concerns understanding the effects of isolation and of
group size and of communication with other groups on the productivity of human societies. Let's
learn from the extreme examples of isolation of human societies. If isolation has any effect on
human societies, the places we're most likely to see that effect are the histories of those two
islands off southeastern Australia called Tasmania and Flinders Island. They lie about 200 miles
off the southeast coast of Australia and are separated today from Australia by Bass Straits, but
those straits are relatively shallow, so their floor lay above sea level at glacial times of low sea
level up to about 10,000 years ago. The Bass Straits between Tasmania and Australia were then
dry land, and Tasmania was part of the Australian mainland, just as Britain used to be part of the
European mainland. When the glaciers melted, sea level rose and cut off Tasmania from the
Australian mainland. So when Tasmania and Flinders were part of the Australian mainland,
Australian Aborigines walked down to Tasmania and Flinders from the mainland.

And then 10,000 years ago the glaciers melted, sea level rose, and Tasmania became cut off from
mainland Australia by Bass Straits, which are really rough waters. In addition, the watercraft of
the Tasmanians were wash-through rafts that got waterlogged and sank after about a dozen
hours. The result was that the boats of the Tasmanians could not reach Australia, and the boats of
the mainland Aboriginal Australians could not reach Tasmania.

Thus, for the last 10,000 years the Tasmanians represented a study of isolation unprecedented in
human history except in science fiction novels. Here were 4,000 Aboriginal Australians cut off
on an island, and they remained totally cut off from any other people in the world until the year
1642, when Europeans "discovered" Tasmania. What happened during those 10,000 years to that
isolated 4,000-person society? And what about nearby Flinders Island, which originally
supported a population of 200 cut-off Aboriginal Australians? — what happened to that tiny
isolated society of 200 people during those 10,000 years?

When Europeans discovered Tasmania in the 17th century, it had technologically the simplest,
most "primitive" human society of any society in the modern world. Native Tasmanians could
not light a fire from scratch, they did not have bone tools, they did not have multi-piece stone
tools, they did not have axes with handles, they did not have spear-throwers, they did not have
boomerangs, and they did not even know how to fish. What accounts for this extreme simplicity
of Tasmania society? Part of the explanation is that during the 10,000 years of isolation, the
Aboriginal Australians, who numbered about 250,000, were inventing things that the isolated
4,000 Tasmanians were not inventing, such as boomerangs. Incredibly, though, archeological
investigations have shown one other thing: during those 10,000 years of isolation, the
Tasmanians actually lost some technologies that they had carried from the Australian mainland
to Tasmania. Notably, the Tasmanians arrived in Tasmania with bone tools, and bone tools
disappear from archeological record about 3,000 years ago. That's incredible, because with bone
tools you can have needles, and with needles you can have warm clothing. Tasmania is at the
latitude of Vladivostok and Chicago: it's snowy in the winter, and yet the Tasmanians went about
either naked or just with a cape thrown over the shoulder.

How do we account for these cultural losses and non-inventions of Tasmanian society? Flinders
Island was even more extreme — that tiny society of 200 people on Flinders Island went extinct
several millenia ago. Evidently, there is something about a small, totally isolated human society
that causes either very slow innovation or else actual loss of existing inventions. That result
applies not just to Tasmania and Flinders, but to other very isolated human societies. There are
other examples. The Torres Strait islanders between Australia and New Guinea abandoned
canoes. Most Polynesian societies lost bows and arrows, and lost pottery. The Polar Eskimos lost
the kayak, Dorset Eskimos lost dogs and bow drills, and Japan lost guns.

To understand these losses in extreme isolation, the easiest case to understand is Japan, because
the loss of firearms in Japan was witnessed and described. It took place in a literate society. Guns
arrived in Japan around 1543 with two Portuguese adventurers who stepped ashore, pulled out a
gun, and shot a duck on the wings. A Japanese nobleman happened to be there, was very
impressed, bought these two guns for $10,000, and had his sword-maker imitate them. Within a
decade, Japan had more guns per capita than any other country in the world, and by the year
1600 Japan had the best guns of any country in the world. And then, over the course of the next
century, Japan gradually abandoned guns.
What happened was that the Samurai, the warrior class in Japan, had been used to fighting by
standing up in front of their armies and making a graceful speech, the other opposing Samurai
made an answering graceful speech, and then they had one-on-one combat. The Samurai
discovered that the peasants with their guns would shoot the Samurai while the Samurai were
making their graceful speeches. So the Samurai realized that guns were a danger because they
were such an equalizer. The Samurai first restricted the licensing of gun factories to a hundred
factories, and then they licensed fewer factories, and then they said that only three factories
could repair guns, and then they said that those three factories could make only a hundred guns a
year, then ten guns a year, then three guns a year, until by the 1840s when Commodore Perry
came to Japan, Japan no longer had any guns. That represents the loss of a very powerful
technology.

This loss was possible only in Japan because of its isolation; there were no other neighbors
threatening Japan. When firearms arrived in Europe, there were European princes who similarly
banned firearms, and there were European princes who banned printing, but you can guess what
happened. When a prince in the middle of Europe banned firearms, within a short time the prince
next door who did not ban firearms either walked in and conquered, or else the prince who
banned firearms quickly realized his or her mistake and reacquired firearms from next door. The
banning of the guns could work only in isolated Japan, where there were no neighbors as a
threat, and where there were no neighbors from whom to reacquire the technology.

So these stories of isolated societies illustrate two general principles about relations between
human group size and innovation or creativity. First, in any society except a totally isolated
society, most innovations come in from the outside, rather than being conceived within that
society. And secondly, any society undergoes local fads. By fads I mean a custom that does not
make economic sense. Societies either adopt practices that are not profitable or for whatever
reasons abandon practices that are profitable. But usually those fads are reversed, as a result of
the societies next door without the fads out-competing the society with the fad, or else as a result
of the society with the fad, like those European princes who gave up the guns, realizing they're
making a big mistake and reacquiring the fad. In short, competition between human societies that
are in contact with each other is what drives the invention of new technology and the continued
availability of technology. Only in an isolated society, where there's no competition and no
source of reintroduction, can one of these fads result in the permanent loss of a valuable
technology. So that's one of the two sets of lessons that I want to draw from history, about what
happens in a really isolated society and group.

The other lesson that I would like to draw from history concerns what is called the optimal
fragmentation principle. Namely, if you've got a human group, whether the human group is the
staff of this museum, or your business, or the German beer industry, or Route 128, is that group
best organized as a single large unit, or is it best organized as a number of small units, or is it
best fragmented into a lot of small units? What's the most effective organization of the groups?

I propose to get some empirical information about this question by comparing the histories of
China and Europe. Why is it that China in the Renaissance fell behind Europe in technology?
Often people assume that it has something to do with the Confucian tradition in China
supposedly making the Chinese ultra-conservative, whereas the Judeo-Christian tradition in
Europe supposedly stimulated science and innovation. Well, first of all, just ask Galileo about
the simulating effects of the Judeo-Christian tradition on science. Then, secondly, just consider
the state of technology in medieval Confucian China. China led the world in innovation and
technology in the early Renaissance. Chinese inventions include canal lock gates, cast iron,
compasses, deep drilling, gun powder, kites, paper, porcelain, printing, stern-post rudders, and
wheelbarrows — all of those innovations are Chinese innovations. So the real question is, why
did Renaissance China lose its enormous technological lead to late-starter Europe?

We can get insight by seeing why China lost its lead in ocean-going ships. As of the year 1400,
China had by far the best, the biggest, and the largest number of, ocean-going ships in the world.
Between 1405 and 1432 the Chinese sent 7 ocean-going fleets, the so-called treasure fleets, out
from China. Those fleets comprised hundreds of ships; they had total crews of 20,000 men; each
of those ships dwarfed the tiny ships of Columbus; and those gigantic fleets sailed from China to
Indonesia, to India, to Arabia, to the east coast of Africa, and down the east coast of Africa. It
looked as if the Chinese were on the verge of rounding the Cape of Good Hope, coming up the
west side of Africa, and colonizing Europe.

Well, China's tremendous fleets came to an end through a typical episode of isolationism, such as
one finds in the histories of many countries. There was a new emperor in China in 1432. In
China there had been a Navy faction and an anti-Navy faction. In 1432, with the new emperor,
the anti-Navy faction gained ascendancy. The new emperor decided that spending all this money
on ships is a waste of money. Okay, there's nothing unusual about that in China; there was also
isolationism in the United States in the 1930's, and Britain did not want anything to do with
electric lighting until the 1920s. The difference, though, is that this abandoning of fleets in China
was final, because China was unified under one emperor. When that one emperor gave the order
to dismantle the shipyards and stop sending out the ships, that order applied to all of China, and
China's tradition of building ocean-going ships was lost because of the decision by one person.
China was a virtual gigantic island, like Tasmania.

Now contrast that with what happened with ocean-going fleets in Europe. Columbus was an
Italian, and he wanted an ocean-going fleet to sail across the Atlantic. Everybody in Italy
considered this a stupid idea and wouldn't support it. So Columbus went to the next country,
France, where everybody considered it a stupid idea and wouldn't support it. So Columbus went
to Portugal, where the king of Portugal considered it a stupid idea and wouldn't support it. So
Columbus went across the border to a duke of Spain who considered this stupid. And Columbus
then went to another duke of Spain who also considered it a waste of money. On his sixth try
Columbus went to the king and queen of Spain, who said this is stupid. Finally, on the seventh
try, Columbus went back to the king and queen of Spain, who said, all right, you can have three
ships, but they were small ships. Columbus sailed across the Atlantic and, as we all know,
discovered the New World, came back, and brought the news to Europe. Cortez and Pizarro
followed him and brought back huge quantities of wealth. Within a short time, as a result of
Columbus having shown the way, 11 European countries jumped into the colonial game and got
into fierce competition with each other. The essence of these events is that Europe was
fragmented, so Columbus had many different chances.
Essentially the same thing happened in China with clocks: one emperor's decision abolished
clocks over China. China was also on the verge of building powerful water-powered machinery
before the Industrial Revolution in Britain, but the emperor said "Stop," and so that was the end
of the water-powered machinery in China. In contrast, in Europe there were princes who said no
to electric lighting, or to printing, or to guns. And, yes, in certain principalities for a while
printing was suppressed. But because Europe in the Renaissance was divided among 2,000
principalities, it was never the case that there was one idiot in command of all Europe who could
abolish a whole technology. Inventors had lots of chances, there was always competition
between different states, and when one state tried something out that proved valuable, the other
states saw the opportunity and adopted it. So the real question is, why was China chronically
unified, and why was Europe chronically disunified? Why is Europe disunified to this day?

The answer is geography. Just picture a map of China and a map of Europe. China has a smooth
coastline. Europe has an indented coastline, and each big indentation is a peninsula that became
an independent country, independent ethnic group, and independent experiment in building a
society: notably, the Greek peninsula, Italy, the Iberian peninsula, Denmark, and
Norway/Sweden. Europe had two big islands that became important independent societies,
Britain and Ireland, while China had no island big enough to become an independent society
until the modern emergence of Taiwan. Europe is transected by mountain ranges that split up
Europe into different principalities: the Alps, the Pyrenees, Carpathians — China does not have
mountain ranges that transect China. In Europe big rivers flow radially — the Rhine, the Rhone,
the Danube, and the Elbe — and they don't unify Europe. In China the two big rivers flow
parallel to each other, are separated by low-lying land, and were quickly connected by canals.
For those geographic reasons, China was unified in 221 B.C. and has stayed unified most of the
time since then, whereas for geographic reasons Europe was never unified. Augustus couldn't do
it, Charlemagne couldn't do it, and Napoleon and Hitler couldn't unify Europe. To this day, the
Europe Union is having difficulties bringing any unity to Europe.

So, the lesson I draw is that competition between entities that have free communication between
them spurred on Europe. In China one despot could and did halt innovation in China. Instead,
China's experience of technological innovation came during the times when China's unity fell
apart, or when China was taken over temporarily by an outside invader.

You've seen that effect even in modern times. Twenty years ago, a few idiots in control of the
world's most populous nation were able to shut down the educational system for one billion
people at the time of the Great Cultural Revolution, whereas it's impossible for a few idiots to
shut down the educational system of all of Europe. This suggests, then, that Europe's
fragmentation was a great advantage to Europe as far as technological and scientific innovation
is concerned. Does this mean that a high degree of fragmentation is even better? Probably not.
India was geographically even more fragmented than Europe, but India was not technologically
as innovative as Europe. And this suggests that there is an optimal intermediate degree of
fragmentation, that a too-unified society is a disadvantage, and a too-fragmented society is also a
disadvantage. Instead, innovation proceeds most rapidly in a society with some intermediate
degree of fragmentation.
Okay, let's now start to apply all this to what we should do if we want to try to go out and get
rich. Let's apply this to some affluent modern industries and companies. I'll give you two
examples. The first example concerns that image of productivity that we Americans have as we
look toward Japan. We fantasize that the industrial productivity of Japan and Germany is greater
than that of the United States. And that's not true. On the average, American industrial
productivity is higher than the industrial productivity of either Japan or Germany. But that
average figure conceals differences among the industries of the same country, related to
differences in organization — and those differences are very instructive. Let me give you two
examples from case studies carried out by the McKinsey Corporation, an economics study
industry based in Washington. These two examples involve the German beer industry and the
Japanese food-processing industry.

What about the German beer industry? Well, the Germans are very efficient in some of their
industries. The German metal-working industry and the German steel industry are equal in
productivity to those of the United States, but the German beer-producing industry has a
productivity only 43% that of the United States. And it's not that the Germans make bad beer; the
Germans make wonderful beer. Whenever my wife and I go to Germany, we take along an extra
suitcase specifically for the purpose of filling it up with bottles of German beer, which we take
back and dole out to ourselves for the year after each of our trips to Germany. Why, then, since
the Germans make such great beer, and since their industrial organization works so successfully
for steel and metal, can't they achieve a successful industrial organization for beer?

It turns out that the German beer industry suffers from small-scale production. There are 1,000
little local beer companies in Germany, shielded from competition with each other because each
German brewery has virtually a local monopoly, and shielded from competition with imports.
The United States has 67 major beer breweries, producing 23 billion liters of beer per year.
Germany has 1,000 major beer breweries, producing only half as much beer per year as the
United States. That's to say that the average brewery in the U.S. produces 31 times more beer
than the average brewery in Germany.

That fact results from German local tastes and German government policies. German beer
drinkers are fiercely loyal to their local brand of beer. And so there is no national brand of beer
in Germany, analogous to Budweiser or Miller or Coors in the United States. Instead, most
German beer is consumed within 30 miles of the place where it is brewed. And any of you who
have been in Germany know that Germans love their local beer and loathe the beer that comes
from next door. The result is that the German beer industry cannot profit from economies of
scale. In the beer industry, as in other industries, production costs decrease greatly with size. The
bigger the refrigerator unit for making the beer, and the longer the bottle-filling line, the cheaper
is the cost of brewing beer. So these tiny German beer industries are relatively inefficient.
There's no competition; there are just 1,000 local monopolies.

That outcome, of Germans having their local beer loyalties, is reinforced by German government
law. The German government makes it hard for foreign beers to compete on the German market.
The German government has so-called beer purity laws. The German government specifies
exactly what can go into beer, and not surprisingly what can go into beer is what German
breweries put into beer, and it's not what American, French, and Swedish breweries like to put
into beer. So it's difficult for foreign breweries to compete on the German beer market. The result
is that German beer is not exported very much. Any of you who like to buy Lowenbrau in the
U.S. should look at the label in the supermarket: your U.S.-bought Lowenbrau is not brewed in
Germany, it's brewed on license in the United States with American productivity and American
efficiencies of scale.

The same inefficiency turns out to characterize some other German industries. The German soap
industry and the German consumer electronics industry are also inefficient; their companies are
not exposed to competition with each other, nor are they exposed to foreign competition, and so
they do not acquire the best practices of international industry. But that disadvantage is not true
for the German metal-producing industry or steel industry. There, big German companies
compete with each other and they compete internationally, and therefore they are forced to
acquire best international practices through competition.

There you have an example from the German beer industry about the disadvantages of having
lots of small groups that are secretive and don't compete with each other. The other example that
I want to tell you about is the Japanese food-processing industry. I mentioned that we Americans
are virtually paranoid about the efficiency of the Japanese, and it's true for some Japanese
industries, but not for their food-processing industry. Japanese processed food is produced with
an efficiency 32% of American processed foods. There are 67,000 food processing companies in
Japan; there are only 21,000 in the United States, although the U.S. has double Japan's
population, so the average food-processing company in the United States is six times bigger than
its Japanese counterpart. What is the reason why the Japanese food-processing industry, like
German beer industries, consists of small companies with local monopolies?

It turns out to be basically the same two reasons as with German beer: namely, local tastes
creating local monopolies, and government policies. The Japanese are fanatics for fresh foods.
Any of you who have been to Japan, as my wife and I were in October, will remember what it
says on Japanese containers. In the United States, when you go to the supermarket, there's one
date on the container, the date by which you're supposed to throw away that bottle of milk. In
Japan there are three dates on the container: there's the date when the milk was manufactured,
and there's the date when the milk arrived at the supermarket, and then there's the date when the
milk should be thrown away, and these dates are in big letters; the Japanese really care about the
dates. So the result is that milk production in Japan always starts at one minute past midnight, so
that the milk that goes to market that morning is today's milk. If milk had been produced at 11:59
p.m., the milk company would have to stamp on its container that this milk was made yesterday,
and no Japanese person would buy it. The result is again that Japanese food-processing industries
enjoy local monopolies. Obviously, a milk producer up in Hokkaido, northern Japan, is not going
to be able to compete in Kyushu, in southern Japan, with a Kyushu producer, because of the
several days in transit from Hokkaido. By the time a carton arrives in Kyushu, the people will
read on the container that this milk is three days old, and no Japanese person would buy it.

So that's one thing that creates local monopolies for food production in Japan: Japanese
fanaticism about really fresh food. And the second thing is Japanese government policy, which
reinforces these local monopolies. The Japanese government obstructs the import of foreign
processed food by slapping on a ten-day quarantine. And because the Japanese care about food
that was produced that very day, naturally by the time that American beef, chicken, or whatever
arrives at the supermarket and the date says ten days old, the Japanese are not very enthusiastic
about buying those American products. And there are other restrictions that the Japanese
government imposes on foreign imports.

The result is that Japanese food-processing industries are not exposed to domestic competition,
they're all local monopolies, they're not exposed to foreign competition, and they don't learn the
best methods in the international trade for producing food. And the result is that, in Japan,
Japanese beef costs $200 a pound. My wife and I had heard about that before we went to Japan,
but what we did not realize until we were brought into a supermarket by my wife's Japanese
cousin is that chicken in Japan costs $25 a pound. The reason the Japanese can get away with
that is that Japanese chicken producers are not exposed to competition with super-efficient
American chicken producers.

Now all those features are not true for some other Japanese industries. The Japanese steel
industry, the Japanese metal industry, the Japanese car industry, their car-part industry, and their
electronic industries have productivities greater than our American counterparts. But the
Japanese soap industry, and the Japanese beer industry, and the Japanese computer industry, like
the Japanese food-processing industry, are not exposed to competition, do not apply the best
practices, and so have ended up with productivities below those of corresponding industries in
the United States.

Now let's finally apply these lessons to comparing different industries or industrial belts within
the United States. I mentioned that when I was growing up, Route 128 outside of Boston led the
world in productivity for an industrial belt, but Route 128 has now fallen behind Silicon Valley.
Since my book "Guns, Germs, and Steel" was published, I've spent a lot of time talking with
people from Silicon Valley and some from Route 128, and they tell me that the corporate ethos
in these two industrial belts is quite different. Silicon Valley consists of lots of companies that
are fiercely competitive with each other, but nevertheless there's a lot of collaboration, and
despite the competition there is a free flow of ideas and a free flow of people and a free flow of
information between these companies that compete with each other. In contrast, I'm told that the
business of Route 128 are much more secretive, and insulated from each other like Japanese
milk-producing companies.

Or again, what about the contrast between Microsoft and IBM? Again, since my book was
published, I've acquired friends at Microsoft, and I've learned about Microsoft's organization,
which is quite distinctive. Microsoft has lots of units, with free communication between units,
and each of those units may have five to ten people working in them, but the units are not micro-
managed, they are allowed a great deal of freedom in pursuing their own ideas. That unusual
organization at Microsoft, broken up in to a lot of semi-independent units competing within the
same company, contrasts with the organization at IBM, which until four years ago had much
more insulated groups. A month ago, when I was talking in the industrial belt of North Carolina,
the Raleigh-Durham area industrial belt, I met someone who is on the board of directors of IBM,
and that person told me, Jared, what you say about IBM was quite true until four years ago: IBM
did have this secretive organization which resulted in IBM's loss of competitive ability, but then
IBM acquired a new CEO who changed things drastically, and IBM now has a more Microsoft-
like organization, and you can see it, I'm told, in the improvement in IBM's innovativeness.

So what this suggests is that we can extract from human history a couple of principles. First, the
principle that really isolated groups are at a disadvantage, because most groups get most of their
ideas and innovations from the outside. Second, I also derive the principle of intermediate
fragmentation: you don't want excessive unity and you don't want excessive fragmentation;
instead, you want your human society or business to be broken up into a number of groups which
compete with each other but which also maintain relatively free communication with each other.
And those I see as the overall principles of how to organize a business and get rich.

But, let me conclude by emphasizing some obvious restrictions. I'm sure all of you are already
thinking to yourselves, "But, but, but, he's forgot — but but but...."— Yes, let's go back to those
but-but-buts. One restriction is, I mentioned at the beginning, "all other things being equal".
Obviously the best organization is not going to help with an idiot as a CEO, and the success of
Microsoft certainly depends, at least in part, on the unusual qualities of Bill Gates, as well as on
the unusual organization of Microsoft.

In addition, I've been talking about conditions to maximize productivity and creativity and
moneymaking ability. There are other considerations in organized human groups, and there are
conditions under which productivity is not the thing you're most interested in. There are
conditions where more centralization may be appropriate. For example, during a war, you do not
want your air force, army, and navy to be fiercely competing with each other, but instead you
want during a war more centralized control than you do in peace time. And there are also human
groups for which productivity and differential money-making ability are not the overriding
consideration. I don't want you to go home tonight and each of you to say to your spouse or
significant other, "Darling, I've just heard this guy Jared Diamond, who says that within human
groups competition is what spurs productivity and innovation, and so I think we need to follow
his advice in our household. For the next month let's see which of us earns a bigger income, and
at the end of the month the bigger income-producer will keep on with the job, and the one of us
who has lower income and is less efficient can turn to scrubbing the floors and shopping at the
supermarkets." That just illustrates: there are other considerations in a marriage than optimizing
productivity.

Again, I don't want you to go home to your several children, and say, "Sweetie-pies, I heard this
talk today by this guy Jared Diamond who enunciated some principles that I think would be
really good for rearing children. We're going to see what your grades are at mid-term, and based
on those grades, whichever one of you comes closer to getting all A's, that one we will support to
the hilt, private schools, college, whatever you need, whereas those of you who get poor grades
can start jobs as a shoe-shine boy or girl" — No! In a family, and in some other human groups,
productivity is not the appropriate consideration for judging the best organization of the group.

Nevertheless there are some human groups where productivity is indeed a significant
consideration. And that certainly includes businesses, industrial belts, and to a considerable
degree, countries. In order to understand how to organize these businesses, we could perform
natural experiments. We could set up, if we were rich enough, a hundred businesses, organized a
hundred different ways, see which businesses went bankrupt, and after 20 years figure that we
now have the correct industrial organization. But that's an inefficient way to do it. We can
instead learn from the comparative approach, by looking to natural experiments of history. I hope
that some of you will be able to apply these lessons to acquiring the wealth that has so far eluded
me.